AI Drafter 
TaxTMI 
TaxTMI 
2017 (7) TMI 306
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce company (NBFC) duly registered with the Reserve Bank of India (RBI) and engaged in the business of asset financing which primarily includes having a well diversified portfolio comprising of a bunch of financial products such as commercial vehicles finance, cars & utility finance vehicles finance, construction & strategic construction equipment finance, tractor finance, Suvidha (Refinance) etc. Besides this, the assessee also provides lease of vehicles to various corporates. The assessee regularly follows the mercantile system of accounting. The assessee for the Asst Year 2013-14 had electronically filed its return of income on 28.11.2013 declaring taxable income of Rs. 164,31,05,540/-. This return was later revised on 24.3.2015 declaring the same total income but with some variation in the claim of tax deducted at source. In the return, the assessee made the upfront claim of expenses amounting to Rs. 81,22,83,000/- as deductible expenditure. This was subjected to detailed examination by the ld AO in the assessment proceedings by understanding the nature of expenses, verification of agreements with Direct Selling Agents, principles of accrual, principle of matching concept, prin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 605 (SC). The ld CITA after obtaining the remand report from the ld AO and after considering the submissions made by the assessee to the remand report, confirmed the impugned disallowance of upfront claim of expenses amounting to Rs. 81,22,.83,000/-. Aggrieved, the assessee is in appeal before us on the following grounds :- 2. That, on the fact and circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of the sum of Rs. 75,35,26,000/- claimed by the appellant in respect of Direct Selling Agent commission and cost for arrangement of borrowings for the company without appreciating the fact that the said expenses are allowable on upfront basis under the Income Tax Act, 1961. 3.a.) That, on the fact and circumstances of the case, the Ld. CIT(A) erred in confirming the disallowance of the sum of Rs. 5,87,57,000/- in respect of expenditure incurred by the appellant for acquiring portfolio without adjudicating on it separately since the Ld. AO had disallowed the same by holding it to be capital in nature and without appreciating the fact that the appellant was engaged in the business of financing. b) That, on the fact and circumstances o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 7. A copy of a specimen Memorandum of Understanding (MOU) between Hyundai Construction Equipment India Pvt Ltd and the assessee for extending finance for purchase of Hyundai Cars - enclosed in pages 113 to 117 of Paper Book I 8. Copy of assessee's submission before ld CITA - enclosed in pages 1 to 43 of Paper Book II 9. Copy of remand report of ld AO - enclosed in pages 44 to 50 of Paper Book II 10. Copy of assessee's reply to remand report - enclosed in pages 51 to 61 of Paper Book II 11. Copy of RBI's guidelines dated 21.8.2012 - enclosed in pages 62 to 89 of Paper Book II 12. Copy of detailed sheet showing payment of commission to DSAs on sourcing business (specimen) - enclosed in page 90 of Paper Book II 13. Copy of Audited financial statements for AY 2010-11 - enclosed in pages 91 to 122 of Paper Book II 14. Copy of ITR Acknowledgement for AY 2010-11 - enclosed in page 123 of Paper Book II 15. Copy of Computation of income for AY 2010-11 - enclosed in page 124 of Paper Book II 16. Copy of Assessment Order u/s 143(3) of the Act dated 31.1.2013 for AY 2010-11 - enclosed in pages 125 to 131 of Pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ook I, DSAs are obligated to perform this function, among others :- Clause 5 of the agreement - OBLIGATIONS OF DSA The DSA agrees and undertakes that the DSA shall : ------------------ ----------------- ----------------- n. Ensure delivery of the vehicle to the Customer only after intimation of Magma Fincorp Ltd's (MFL's) approval of the Customer and only after completion of all the formalities like registration of the vehicle, noting of MFL's charge in the registration book in terms of the loan agreement signed between the Customer and MFL, insuring the vehicle and such other similar requirement(s) are completed. After the loan disbursement by MFL a copy of the Registration Certificate within 45 days with endorsement in favour of MFL, the Insurance Policy within 45 days with the Hypothecation notings and Invoice (within a day) with the lien favouring MFL and all other collateral security documents as may be specified by MFL from time to time shall be delivered to MFL. In the event the said documents are not submitted to MFL within specified days of disbursement of the loan, the entire loan will become payable forthwith and the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent of MFL, except as provided and permitted in this Agreement. The activities of the DSA and its Personnel shall not be construed to be MFL's activities. Save and except as may be expressly permitted by MFL, the DSA and its Personnel shall not at any time use the name / logo of MFL in any sales or marketing publication or advertisement, or in any other manner without prior written consent of MFL. From the aforesaid clauses in the DSA agreement, it could be safely concluded that the expense on account of commission / brokerage accrues on the assessee as soon as it receives the bill from DSA on the basis of procurement of business and on completion of insurance and registration formalities stated supra. Thus although the loan or lease extended by the assessee to the customers procured by DSA continues for a certain period of time as stated in the loan / lease agreement, the fees charged by the DSAs for procuring customers for the said loan lease has to be paid to the DSAs immediately on disbursal of the loan / lease subject to fulfillment of certain insurance / registration formalities as stated supra. Accordingly, the assessee during the year under appeal, had paid DSA commissio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....equires loan portfolios from other companies thus expanding its own loan portfolio and augmenting its business. During the relevant asst year, the assessee had acquired portfolios of 'Loan against Property' cases amounting to Rs. 49765.59 lakhs and 'Auto Lease' cases amounting to Rs. 25611.41 lakhs from GE Money Financial Services Ltd and Religare Finvest Ltd respectively. In the process of acquiring the above loan portfolios, the assessee incurred expenses to the tune of Rs. 5,92,52,000/- being legal fees paid to advocates, professional fees paid to advisors, salary paid to employees in the team working towards the acquisition etc. These expenses accrued to the assessee as soon as it acquired the loan portfolios and the services of the legal and technical advisors and that of the employees were already utilized. During the year under appeal, the assessee incurred a cost of Rs. 5,92,52,000/- on acquiring the loan portfolios and the same was paid by it during the year itself. 5.4. Similarly the assessee had derived subvention income on assets financed which has been offered to tax on upfront basis. The same is explained briefly sa below:- INCOME Subvention Income on assets ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fit earned from subvention income was amortised over the life of the transaction and to maintain uniformity, expenses incurred were also amortised similarly. As a result, the expenses incurred by the assessee on payment of DSA commission and portfolio acquisition cost was amortised by it in its profit and loss account over the tenure of the loans on matching concept and as such in the computation of income, the assessee claimed the expenses of Rs. 81,22,83,000/- on accrual basis. In other words, from Asst Year 2012-13 onwards, the assessee started recognizing income and expenses based on matching concept by following the amortization method in consonance with RBI guidelines, but offered the entire subvention income upfront in the year in which accrued and similarly claimed the entire upfront expenses in the year of accrual and incurrence. Hence this goes to prove that the assessee had not changed the treatment of upfront expenses and income in the return of income. It has been consistently offering the upfront income and claiming upfront expenses as income and expenditure in the year of accrual and incurrence which has also been allowed by the ld AO upto Asst Year 2011-12 in sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....done so, there is no reason for the ld AO to treat the remaining portion of upfront expenditure as deferred revenue expenditure, for allowance of the same in subsequent years. Hence it could be safely concluded that the question of accrual of expenses during the year under appeal cannot be disputed and once the same is not disputed, there is no question of allowing a part of such expenditure. Hence we are not inclined to accept the arguments of the ld DR advanced in this regard by stating that the assessee had not proved the factum of accrual of upfront expenditure in the year under appeal. Moreover, the ld AO had taxed the entire upfront subvention income in the year under appeal as offered to tax by the assessee. But he is trying to take a differential stand only when it comes to allowability of upfront expenditure. It is well settled that there is no concept of Deferred Revenue Expenditure in the provisions of the Act except otherwise stated in sections like section 35D, 35DD etc. The Act recognizes only two types of expenditure in the normal course i.e 'capital expenditure' and 'revenue expenditure'. Admittedly, the subject mentioned upfront expenditure are not in the nature of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uestion and that it is bad. It does not really mean any bad debt which, when it was a good debt, would not have come in to swell the profits." The first limb of s. 36(2)(i)(a) of the present Act only incorporates Rowlatt J.'s principle; that limb enacts very clearly that no deduction shall be allowed for a bad debt, unless such debt has been taken into account in computing the income of the assessee for the previous year or for an earlier previous year. It is implicit in this express condition that the debt should have arisen in the course of carrying on his business. In the second limb of s. 36(2)(i)(a), this condition is not repeated, for the simple reason that the second limb deals with money-lending and banking business in which the money itself is regarded as a stock-in-trade and, therefore, the money lent would certainly come into the revenue account, and, hence, it was perhaps thought to be unnecessary to emphasise the obvious by saying that money lent in a money-lending or banking business must have been taken into account in the computation of money- lending or banking business. The only requirement which was worthwhile to make mention of in a banking or money....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee in its return of income, on accrual basis since they did not accrue to the assessee one time but accrued over the tenure of underlying loan or lease. The relevant asst year being one of the years of the tenure of the loan / lease, the interest or rental accrued during the year was rightly offered to tax by the assessee in its return of income on accrual basis. We find that the subvention income offered to tax by the assessee on upfront basis accrued to the assessee during the year under appeal itself, the moment a vehicle was financed by it post floating of incentive schemes by commercial vehicle manufacturers i.e immediately on extending of loan to the customers for purchase of vehicles, the manufacturers of such vehicles credited the commission due on the same to the assessee's account and the same was offered to tax by the assessee in the year of its accrual / receipt. Similarly, lease rental and interest income accrues to the assessee over the tenure of the lease and loan given out by it, which consist of several years. Thus the amount of interest or lease rental offered by the assessee during the relevant asst year had accrued to it during the current year (being o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nation in clause (iii) above, with which we are admittedly not concerned in this case, it is clear that as per the aforesaid provision any amount on account of interest paid becomes an admissible deduction under Section 36 if the interest was paid on the capital borrowed by the assessee and this borrowing was for the purpose of business or profession. There is no quarrel, in the present case, that the money raised on account of issuance of the debentures would be capital borrowed and the debentures were issued for the purpose of the business of the assessee. In such a scenario when the interest was actually incurred by the assessee, which follows the mercantile system of accounting, on the application of this statutory provision, on incurring of such interest, the assessee would be entitled to deduction of full amount in the assessment year in which it is paid. While examining the allowability of deduction of this nature, the AO is to consider the genuineness of business borrowing and that the borrowing was for the purpose of business and not an illusionary and colourable transaction. Once the genuineness is proved and the interest is paid on the borrowing, it is not within the pow....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he interest over a period of five years was that the term of debentures was five years and that the assessee had itself given this very treatment in the books of accounts, viz, spreading it over a period of five years in its final accounts by not debiting the entire amount in the first year to the Profit and Loss account and it has, in fact, debited 1/5th of the interest paid to the Profit and Loss account from the second year onwards. The High Court, in its impugned judgment, has based its reasoning on the second aspect and applied the principle of 'Matching Concept' to support this conclusion. 10. Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. While taking this view, the AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture holder could opt for upfront payment of Rs. 55 per debenture towards interest as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....which are to be fulfilled for allowing the deduction on this account in the following words: "...The term "interest" has been defined under Section 2(28A) of the Act. Briefly, interest payment is an expense under Section 36(1)(iii). Interest on monies borrowed for business purposes is an expenditure in a business [see 35 ITR 339 - Madras]. For claiming deduction under Section 36(1)(iii), the following conditions are required to be satisfied viz. the capital must have been borrowed; it must have been borrowed for business purpose and the interest must be paid. The word "Paid" is defined in Section 43(2). It means payment in accordance with the method followed by the assessee. In the present case, therefore, the word "Paid" in Section 36(1 )(iii) should be construed to mean paid in accordance with the method of accounting followed by the assessee i.e. Mercantile System of accounting..." Notwithstanding the aforesaid, the High Court chose to decline the whole deduction in the year of payment, thereby affirming the orders of the authorities below, by invoking the 'Matching Concept'. It is observed by the High Court that under the mercantile system of accountin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs. 55 per debenture. In Bharat Earth Movers v. Commissioner of Income Tax (2000) 6 SCC 645, this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability quantified and discharged at a future date. Following pamsasay geh afvreo mto tbhee aforesaid judgment is worth a quote: "The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain." The present case is even on a strong....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." 16. Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed. 20. In view of the aforesaid discussion, we are of the opinion that the judgment and the orders of the High Court and the authorities below do not lay down correct position in law. The assessee would be entitled to deduction of the entire expenditure of Rs. 2,72,25,000 and Rs. 55,00,000 respectively in the year in which the amount was actually paid. The appeals are allowed in the aforesaid terms with no orders as to costs. 5.10.1. From the aforesaid judgement, what we are able to decipher is the assessee is given a choice to claim the expenditure as revenue in nature in one go i.e in the year of incurrence or alternatively, claim the same as amortiza....